The spread of the Covid-19 virus is causing considerable volatility across financial markets. The social distancing that is required to contain the disease has catastrophic short-term economic effects and, at this stage, it is difficult to confidently say how long the economic disruption will last.
1) Brexit risk remains, but Corbyn risk has gone
In recent years, investors have faced two major sources of political risk when considering UK assets. The possibility of a hard Brexit and resulting damage to the UK economy was one.
One of the reasons 2018 turned out to be such a disappointment for equity investors was the underwhelming performance of the Chinese economy, the ramifications of which were felt as far afield as Germany.
While most equity markets had a rough year, the performance of emerging markets and eurozone stocks were among the worst. So for 2019, some of the most important questions facing investors are what caused the slowdown in China last year and when the economy is likely to bounce back.
Markets started 2018 full of optimism. The US economy delivered stellar performance – buoyed by US president Donald Trump’s tax cuts, which propelled a surge in growth and corporate earnings – while the US unemployment rate hit an almost 50-year low. An upward drift in inflation was gradual, so there weren’t any big surprises from the US Federal Reserve, which hiked interest rates in line with its guidance.
The UK has had a good summer. In economic terms, so has the global economy, which has enjoyed strong growth for nearly 10 years. However, as the nights draw in and the leaves start to fall, investors know that just as the seasons inevitably change, economic expansions end. There is nothing particularly troubling in the latest economic data, but some investors are considering how to prepare for gloomier days.
What is the outlook for the UK economy and UK interest rates? In his May press conference, governor of the Bank of England Mark Carney gave us only vague guidance. An array of factors are clouding the bank’s crystal ball and making it very hard to judge the future path of the economy.
Falling bond yields have been a rock-solid feature of US and UK markets for decades. But that might be about to change.
Europe is about two years behind the US recovery - however, investors haven’t taken heed of all they learned about the US over that period.